**Exhibit99.4**

**Management’s Discussion andAnalysis**

**ofFinancial Condition and Results of Operations**

**The following analysis provides areview of the Company’s results of operations, financial condition and cashflows for the three-month and full-year ended December 31, 2006. In this MD&A, the “Company”, “we”, “us”, and“our” mean Æterna Zentaris Inc. and its subsidiaries. This discussionshould be read in conjunction with the information contained in Æterna ZentarisInc.’s annual consolidated financial statements and related notes for the yearsended December 31, 2006, 2005 and 2004. Our consolidated financial statements are reported in US dollarsand have been prepared in accordance with generally accepted accountingprinciples in Canada, or Canadian GAAP. Significant differences in measurementfrom generally accepted accounting principles in the United States, or U.S.GAAP, are set out in note 24 of our consolidated financial statements.***All amounts are in USdollars unless otherwise indicated.*

# **Company Overview**

Æterna Zentaris Inc. (TSX:AEZ, NASDAQ: AEZS) is a growing, global biopharmaceutical company focused onendocrine therapy and oncology with proven expertise in drug discovery,development and commercialization.

Our strategy is toaggressively advance our robust product development pipeline with a focus onour lead product candidates, cetrorelix, ozarelix and perifosine, as well asour promising, targeted earlier-stage programs with high potential.

With this strategy, ourexpertise and depth, our strategic alliances and financial resources, it is ourgoal to emerge as a fully-integrated specialist-driven global biopharmaceuticalcompany with a strategic focus on endocrine therapy and oncology.

As of January 2, 2007,the Company became a pure play biopharmaceutical having completed the spin-offof Atrium Biotechnologies Inc., **(“Atrium”)**,****our formersubsidiary.

**Sale of an Interest in Atrium Biotechnologies Inc.and Subsequent to Year-End Special Distribution to Æterna Zentaris Shareholdersof the Remaining Interest**

During 2006, as part of a thorough strategic planningprocess, we decided to spin-off Atrium in two phases. First, we sold a partialinterest in Atrium (3.5 million shares) by

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way of a secondary offering, and second, wedistributed our remaining interest in Atrium (11 million shares) to ourShareholders.

On September 19, 2006, Æterna Zentaris initiated the secondaryoffering to sell 3,485,000 subordinate voting shares of Atrium at a price ofCAN$ 15.80 per share. This secondary offering closed on October 18, 2006 and generatednet proceeds of $45 million to Æterna Zentaris. The gain on disposal ofAtrium shares was $29 million. Our remaining interest at that date was11,052,996 subordinate voting shares of Atrium, representing approximately36.1% of their issued and outstanding shares. Therefore, we no longer had a controllinginterest in Atrium. As of December 31, 2006, Atrium is presented in ourfinancial statements as a long-term investment and recorded using the equitymethod. All recorded historical operations and cash flows prior to October 18,2006 qualify as Discontinued Operations and are, therefore, presented as suchin our financial statements.

On December 15, 2006, Æterna Zentaris shareholdersapproved the reduction of the stated capital of the Company to give effect tothe special distribution of our remaining interest in Atrium to all ourshareholders. This special distribution was completed on January 2, 2007. Foreach common share held as of the Record Date of December 29, 2006, ÆternaZentaris shareholders received 0.2079 subordinate voting shares of Atrium. Inthe first quarter of 2007, as a result of this special distribution, our long-terminvestment in Atrium will be removed from the balance sheet, the fair value ofthe distributed interest will reduce our share capital and the differencebetween the fair value and the book value of this interest, taking into accountthe related income taxes and cumulative translation adjustment, will bepresented as Other Capital.

**ConsolidatedResults of Operations**

For the years ended December 31, 2006, 2005 and 2004,the previously consolidated revenues and expenses of Atrium, representing theformer Active Ingredients & Specialty Chemicals Segment as well as theHealth & Nutrition Segment, have been reclassified as discontinuedoperations.

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The following table sets forth certain Canadian GAAPconsolidated financial data in thousands of US dollars, except per share data.
| ** **                                                    | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| **Consolidated  revenues**                                    |       |                                        |       |   |   |   |   |
| Sales and royalties                                           | ** ** | **27,716**                                  |       | 23,643 |   | 19,479 |   |
| License fees                                                  | ** ** | **13,652**                                  |       | 23,530 |   | 23,493 |   |
| Other                                                         | ** ** | **24**                                      |       | 31 |   | — |   |
| ** **                                                    | ** ** | **41,392**                                  |       | 47,204 |   | 42,972 |   |
| ** **                                                    |       |                                        |       |   |   |   |   |
| **Operating  expenses**                                       |       |                                        |       |   |   |   |   |
| Cost of sales                                                 | ** ** | **11,747**                                  |       | 8,596 |   | 7,992 |   |
| Selling, general  and administrative                          | ** ** | **17,235**                                  |       | 15,281 |   | 13,137 |   |
| Research and  development (R&D) costs                     | ** ** | **28,652**                                  |       | 27,075 |   | 23,431 |   |
| R&D tax  credits and grants                               | ** ** | **(1,564**                                  | **)**      | (536 | ) | (845 | ) |
| Depreciation and  amortization                                | ** ** | **9,429**                                   |       | 6,371 |   | 6,136 |   |
| ** **                                                    | ** ** | **65,499**                                  |       | 56,787 |   | 49,851 |   |
| **Loss  from operations**                                     | ** ** | **(24,107**                                 | **)**      | (9,583 | ) | (6,879 | ) |
| ** **                                                    |       |                                        |       |   |   |   |   |
| **Other  revenues (expenses)**                                | ** ** | **703**                                     |       | (5,867 | ) | (3,424 | ) |
| **Share  in the results of an affiliated company**            | ** ** | **1,575**                                   |       | — |   | — |   |
| **Income  tax recovery (expense)**                            | ** ** | **29,129**                                  |       | (493 | ) | (273 | ) |
| **Net  earnings (loss) from continuing operations**           | ** ** | **7,300**                                   |       | (15,943 | ) | (10,576 | ) |
| **Net  earnings from discontinued operations**                | ** ** | **26,090**                                  |       | 26,514 |   | 6,151 |   |
| **Net  earnings (loss) for the year**                         | ** ** | **33,390**                                  |       | 10,571 |   | (4,425 | ) |
| ** **                                                    |       |                                        |       |   |   |   |   |
| **Net  earnings (loss) per share from continuing operations** |       |                                        |       |   |   |   |   |
| **Basic and Diluted**                                         | ** ** | **0.14**                                    |       | (0.35 | ) | (0.23 | ) |
| ** **                                                    |       |                                        |       |   |   |   |   |
| **Net  earnings (loss) per share**                            |       |                                        |       |   |   |   |   |
| **Basic**                                                     | ** ** | **0.64**                                    |       | 0.23 |   | (0.10 | ) |
| **Diluted**                                                   | ** ** | **0.62**                                    |       | 0.23 |   | (0.10 | ) |

 

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**Consolidated Revenues**

**Consolidated revenues**are derived from sales and royalties and license fees. Sales are derived fromImpavido® (miltefosine), the manufacturing of Cetrotide® (cetrorelix), reagents and activepharmaceutical ingredients. Royalties are derived from Cetrotide® (cetrorelix) actually sold by Merck Serono(formerly Serono) in reproductive health assistance for *in vitro*fertilization. Furthermore, license fees are derived from non-periodicmilestone payments, R&D contract fees and amortization of upfront paymentsreceived to date from our licensing partners.

Sales and royalties increasedto $27.7 million in 2006 compared to $23.6 million and $19.5 million forthe same periods in 2005 and 2004 respectively. The year-over-year increase insales and royalties is related to the new sales of Cetrotide® following the September 2006 launch in Japan, thereagents sales generated by Echelon, acquired in January 2005, and increased salesof Impavido®, ouranti-infective product.

License fees revenuesdecreased to $13.7 million in 2006 compared to $23.5 million for the sameperiods in 2005 and 2004. The decrease in 2006 is mainly attributable to a reductionin license revenues from our collaboration with Solvay Pharmaceuticals, partlyoffset by milestone payments received from our Japanese partners with respect tothe approval of Cetrotide® in Japan, and fromour partner Spectrum related to the further development of ozarelix into Phase2 for benign prostatic hyperplasia (BPH) and prostate cancer.

**Consolidated Operating Expenses**

**Consolidated cost of sales**increased to $11.7 million in 2006 comparedto $8.6 million and $8 million for the same periods in 2005 and 2004,respectively. The year-over-year increase in the cost of sales isdirectly related to additional generated sales.

**Consolidated selling, general andadministrative (SG&A) expenses**  increased to $17.2 million in 2006 compared to $15.3 millionfor the same period in 2005. The increase in SG&A expenses is primarily dueto non-recurring corporate expenses of nearly $1.3 million related to thereview of different strategies as part of a thorough strategic planningprocess. For the year ended December 31, 2004, consolidated SG&A were $13.1million. The increase in SG&A between 2004 and 2005 is mainlyattributable to the acquisition of Echelon in January 2005, as well as to the increasein non-cash expenses related to employee-defined benefit pension plan obligation.

**Consolidated R&D costs**were $28.7 million in 2006 compared to $27.1 millionand $23.4 million for the same periods in 2005 and 2004 respectively. AdditionalR&D expenses of $1.6 million spent in 2006 were for cetrorelixin BPH, as well as for further advancement of targeted, earlier-stagedevelopment programs. R&D expense increase between 2004 and 2005 was mainlyattributable to the acquisition of Echelon in January

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2005, as well as non-cashexpenses related to an employee-defined benefit pension plan.

Werecorded **R&D tax credits and grants (R&D)**in 2006****of****$1.6 million comparedto $0.5 million and $0.8 million for the same periods in 2005 and 2004,respectively. The amount recorded in 2006 mainly represents a non-recurringinvestment tax credit that will be used to reduce income taxes that would,otherwise, be payable on the gain on disposal of Atrium shares in October 2006.

**Consolidated depreciation andamortization (D&A)**increased to $9.4 million during 2006, compared to $6.4 million and $6.1 millionfor the same periods in 2005 and 2004, respectively. The $3 million increase inD&A in 2006 is primarily due to an impairment loss of $2.9 million taken onmanufacturing equipment, patents and trademarks related to the termination of non-corepharmaceutical development projects, including Neovastat (Æ-941) and RC-3095.

**Consolidated loss from operations**increased to $24.1 million for the year ended December 31,2006 compared to $9.6 million and $6.9 million for the same periods in2005 and 2004, respectively. The 2006 increase in loss from operations is attributableto a combination of lower license revenues, an increase in non-recurring corporateexpenses, additional R&D expenses related to the initiation of our Phase 3program with cetrorelix in BPH, and additional D&A expenses with respect toan impairment loss on non-core pharmaceutical development projects. This 2006 increasein loss from operations was partly offset by increased sales and royalties, aswell as R&D investment tax credits.

**Consolidated other revenues**for the year ended December 31, 2006 were $0.7 million. We recordedother expenses mainly related to convertible term loans amounting to $5.9million and $3.4 million for the same periods in 2005 and 2004,respectively. The variation between 2005 and 2006 is mainly attributable to theconversion into common shares in February 2006 of the convertible term loans.

**Share in the results of anaffiliated company** recorded in 2006 for $1.6 million isrelated to the investment in Atrium recorded at equity method for the periodfrom October 18 to December 31, 2006.

**C****onsolidated income tax recovery**of $29.1 million****was recorded for the year ended December 31, 2006. Werecorded an income tax expense of $0.5 million and $0.3 million forthe same periods in 2005 and 2004, respectively. Income tax recovery was recordedin 2006 due to a significant adjustment on valuation allowance, as we believethat we expect to utilize some of our income tax assets against future taxablegain that will be realized in connection with the sale of Atrium shares and thespecial distribution of our remaining interest in that company.

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**Net earnings from continuingoperations**of $7.3 million were recorded for the year endedDecember 31, 2006 compared to a net loss from continuing operations of $15.9million in 2005. This increase in net earnings is directly attributable to therecording of an income tax recovery for an amount of $29.1 million related tothe expected utilization of some of our income tax assets against future taxablegain that will be realized in connection with the sale of Atrium shares and thespecial distribution or our remaining interest in that company, partly offsetby increased loss from operations.

**Discontinuedoperations**include the following items:
| ** **                                               | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|
| **(in thousands of US dollars)**                         | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **$**                        | ** ** | **$** | ** ** | **$** | ** ** |
| **Revenues**                                             | ** ** | **239,535**                  |       | 200,863 |   | 136,240 |   |
| ** **                                               |       |                         |       |   |   |   |   |
| **Earnings before the following items**                  | ** ** | **28,360**                   |       | 21,414 |   | 17,146 |   |
| ** **                                               |       |                         |       |   |   |   |   |
| Gain on disposal of Atrium shares                        | ** ** | **29,248**                   |       | — |   | — |   |
| Income tax expense                                       | ** ** | **(19,923**                  | **)**      | (6,838 | ) | (6,093 | ) |
| Gain (loss) on dilution of investments                   | ** ** | **(628**                     | **)**      | 19,002 |   | (74 | ) |
|                                                     |       |                         |       |   |   |   |   |
| **Earnings before non-controlling interest**             | ** ** | **37,057**                   |       | 33,578 |   | 10,979 |   |
| **Non-controlling interest**                             | ** ** | **(10,967**                  | **)**      | (7,064 | ) | (4,828 | ) |
| ** **                                               |       |                         |       |   |   |   |   |
| **Net earnings from discontinued operations**            | ** ** | **26,090**                   |       | 26,514 |   | 6,151 |   |
| ** **                                               |       |                         |       |   |   |   |   |
| **Net earnings per share from discontinued  operations** |       |                         |       |   |   |   |   |
| **Basic**                                                | ** ** | **0.50**                     |       | 0.57 |   | 0.13 |   |
| **Diluted**                                              | ** ** | **0.48**                     |       | 0.57 |   | 0.13 |   |

 

The year-over-yearincrease in **revenues from discontinuedoperations**is mainly attributable to successful acquisitions byAtrium of Pure Encapsulations in 2004, as well as MultiChem and DouglasLaboratories in 2005, combined with year-over-year organic growth.

The **gain on disposal of Atrium shares from discontinuedoperations** is the result of the sale of 3,485,000 subordinate votingshares of Atrium on October 18, 2006, as part of a secondary offering.

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**Income tax expense fromdiscontinued operations**is related to the gain on disposal ofAtrium’s shares for an amount of $7 million, future tax liabilities on theinvestment in an affiliated company (Atrium) for an amount of $5.7 million andAtrium’s operations for an amount of $7.2 million.

**Consolidated net earnings**forthe year ended December 31, 2006****were $33.4 millionor $0.64 per basic share and $0.62 per diluted share, compared to$10.6 million or $0.23 per basic share and diluted share for the sameperiod in 2005. The increase of the net earnings for the 12-month periodended December 31, 2006, is directly attributable to the recording of an incometax recovery for an amount of $29.1 million, lower interest expense for anamount of $5.7 million, due to the conversion of the term loans during thefirst quarter of the year, as well as increased revenues representing $1.6 millionfrom the share in the results of an affiliated company partly offset byincreased loss from operations.

The weighted averagenumber of shares outstanding used to calculate the basic net earnings per sharefor the year ended December 31, 2006 was 52.1 million shares comparedto 46.1 million shares for the same period in 2005. For the diluted netearnings per share, the weighted average number of shares outstanding used forthis calculation was 52.5 million shares in 2006 compared to 46.1 millionshares in 2005. This increase reflects the issuance of common shares followingthe conversion of the convertible term loans, the acquisition of a patent andEchelon as well as the exercise of stock options.

**TotalConsolidated Assets and Long-Term Liabilities**

**CONSOLIDATED BALANCE SHEET DATA**
| ** **                        | ** ** | **As at December 31,** | ** ** | **As at December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|
| **(in  thousands of US dollars)** | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| ** **                        | ** ** | **$**                  | ** ** | **$**                  | ** ** |
| ** **                        | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Total  assets**                 | ** ** | **223,491**            |       | 419,785                |       |
| **Long-term  liabilities**        | ** ** | **28,302**             |       | 246,080                |       |

 

Total consolidatedassets, which were $419.8 million on December 31, 2005, amounted to $223.5 millionas of December 31, 2006. This decrease is mainly attributable to the exclusionof Atrium from the consolidation since October 18, 2006. The Company’sremaining interest in Atrium as of December 31, 2006, is presented as along-term investment and recorded at the equity method. Long-term liabilitiesdecreased from $246.1 million in 2005 to $28.3 million in 2006 for the samereasons.

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**CriticalAccounting Policies and Estimates**

Ourfinancial statements are prepared in accordance with Canadian GAAP. Access to asummary of differences between Canadian and US GAAP is referenced in Note 24of our annual 2006 financial statements. The preparation of financialstatements in accordance with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosures of contingent assets and liabilities at the date of the financialstatements, as well as the reported amounts of revenues and expenses during thereporting years. Significant estimates include the allowance for doubtfulaccounts, provisions for obsolete inventory, future income tax assets andliabilities, the useful lives of property, plant and equipment and intangibleassets, the valuation of intangible assets and goodwill, the fair value ofoptions granted and employee future benefits and certain accrued liabilities. Webase our estimates and assumptions on historical experience and on otherfactors that we believe to be reasonable under the circumstances, the result ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults could differ from these estimates.

Thefollowing summarizes our critical accounting policies and other policies thatrequire the most significant judgment and estimates in the preparation of ourconsolidated financial statements.

**Foreign CurrencyTranslation**

*Reporting Currencyand Self-Sustaining Subsidiaries*

The Company uses the US dollaras its reporting currency. Assets and liabilities of subsidiaries whosefunctional currency is other than the US dollar are translated using theexchange rate in effect at the balance sheet date. Revenues and expenses aretranslated at the average rate in effect during the year. Gains and losses areincluded in the cumulative translation adjustment account in shareholders’equity.

*Foreign CurrencyTransactions and Integrated Foreign Subsidiaries*

The financial statements ofintegrated foreign operations and transactions denominated in currencies otherthan the functional currency are re-measured into the functional currency usingthe temporal method. Under this method, monetary assets and liabilities are re-measuredat the exchange rate in effect on the date of the balance sheet. Non-monetaryassets and liabilities are re-measured at historical rates, unless such assetsand liabilities are carried at market, in which case, they are translated atthe exchange rate in effect on the date of the balance sheet. Revenues andexpenses are re-measured at the monthly average exchange rate. Gains andlosses resulting from such re-measurement are reflected in the statements ofoperations.

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**RevenueRecognition and Deferred revenues**

The Company is currently in a phasein which our product and product candidates are being further developed ormarketed jointly with strategic partners. The existing licensing agreementsusually include one-time payments (upfront payments), payments for research anddevelopment services in the form of cost reimbursements, milestone payments androyalty receipts for licensing and marketing product candidates. Revenuesassociated with those multiple-element arrangements are allocated to thevarious elements based on their relative fair value.

License fees representingnon-refundable payments received upon the execution of license agreements arerecognized as revenue upon execution of the license agreements when the Companyhas no significant future performance obligations and when collectibility ofthe fees is assured. Upfront payments received at the beginning of licensingagreements are not recorded as revenue when received but are amortized based onthe progress to the related research and development work. Milestone payments,which are generally based on developmental or regulatory events, are recognizedas revenue when the milestones are achieved, collectibility is assured, andwhen there are no significant future performance obligations in connection withthe milestones. In those instances where the Company has collected upfront ormilestone payments but has ongoing future obligations related to thedevelopment of the drug product, revenue recognition is deferred and amortizedover the period of its future obligations.

Royalty revenue is recorded whenthe amount of the royalty fee is determinable and collection is reasonablyassured.

Revenues from sales of productsare recognized, net of estimated sales allowances and rebates, when titlepasses to customers, which is at the time goods are shipped, when there are nofuture performance obligations, when the purchase price is fixed anddeterminable, and collection is reasonably assured.

**Allowancefor Doubtful Accounts**

We estimate collectibility ofaccounts receivable on an ongoing basis by reviewing balances outstanding overa certain period of time. We determine our allowance for doubtful accountsreceivable based on our historical accounts receivable collection experienceand on the information that we have about the status of our accounts receivablebalances. If the financial conditions of our customers deteriorate, resultingin an impairment of their ability to make required payments, additionalallowance may be required, which could adversely affect our future results.

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**Provisionsfor Excess and Obsolete Inventories**

Inventory is valued at the lowerof cost and market value. Cost is determined using the first-in, first-outbasis. Cost of finished goods and work-in-progress includes raw materials,labour and manufacturing overhead under the absorption costing method. Marketvalue is defined as replacement cost for raw materials and as net realizablevalue for finished goods and work-in-progress. We determine our reserves forexcess and obsolete inventories based on the quantities we have on hand versusexpected need for these inventories, so as to support future sales of ourproducts. It is possible that additional inventory reserves may occur if futuresales are less than our forecasts or if there is a significant shift in productmix compared to our forecasts, which could adversely affect our future results.

**Researchand Development Costs**

Research costs are expensed asincurred. Development costs are expensed as incurred except for those whichmeet generally accepted criteria for deferral, which are capitalized andamortized against operations over the estimated period of benefit. To date, nocosts have been deferred.

**Impairmentof Long-Lived Assets and Goodwill**

Property, plant and equipmentand intangible assets with finite lives are reviewed when events orcircumstances indicate that costs may not be recoverable. Impairment existswhen the carrying value of the asset is greater than the undiscounted futurecash flows expected to be provided by the asset. The amount of impairment loss,if any, is the excess of its carrying value over its fair value, which fairvalue being determined based upon discounted cash flows or appraised values,depending of the nature of assets.

Finally, goodwill is testedannually, or more frequently if impairment indicators arise, for impairment inrelation to the fair value of each reporting unit to which goodwill applies andthe value of other assets in that reporting unit. An impairment charge isrecorded for any goodwill that is considered impaired.

As at December 31, 2006, following the decision to terminatethe pharmaceutical development of certain of our products, we decided to takean impairment on related manufacturing equipment as well as on certain patentsand trademarks in order to bring them to their fair value. Consequently, anamount of $2.9 million was recorded as additional depreciation andamortization.

**Accounting for Income Tax Expense**

We operate in multiple jurisdictions, and our earningsare taxed pursuant to the tax laws of these jurisdictions. Our effective taxrate may be affected by the changes in, or

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interpretations of, tax laws in any given jurisdiction,utilization of net operating losses and tax credit carry-forwards, changes ingeographical mix of income and expense, and changes in management’s assessmentof matters, such as the ability to realize future tax assets. As a result ofthese considerations, we must estimate our income taxes in each of thejurisdictions in which we operate. This process involves estimating our actualcurrent tax exposure, together with assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes. Thesedifferences result in future tax assets and liabilities, which are included inour consolidated balance sheet. We must then assess the likelihood that ourfuture tax assets will be recovered from future taxable income and establish avaluation allowance for any amounts we believe it will be more likely notrecoverable. Establishing or increasing a valuation allowance increases ourincome tax expense.

Significant management judgment is required indetermining our provision for income taxes, our income tax assets andliabilities, and any valuation allowance recorded against our net income taxassets. Our valuation allowance was significantly adjusted on December 31,2006, mainly because we will be able to utilize some of our income tax assetsagainst the future taxable gain that will be realized in connection with the saleof Atrium shares in 2006 and the special distribution of our remaining interestin Atrium.

The valuation allowance is based on our estimates oftaxable income by jurisdiction in which we operate and the period over whichour income tax assets will be recoverable. In the event that actual resultsdiffer from these estimates or we adjust these estimates in future periods, wemay need to amend our valuation allowance, which could materially impact ourfinancial position and results of operations.

**Stock-Based Compensation Costs**

SinceJanuary 1, 2003, we account for all forms of employee stock-based compensationusing the fair value-based method. This method requires that we make estimatesabout the risk-free interest rate, the expected volatility of our shares andthe expected life of the awards.

**New Accounting Standards**

In January 2005, the CICA issued four new accountingstandards in relation with financial instruments: Section 3855 “FinancialInstruments — Recognition and Measurement”, Section 3865 “Hedges”, section 1530“Comprehensive Income” and Section 3251 “Equity”.

Sections3855, 3865 and 1530 will be adopted by the Company on January 1, 2007. Adoptionof these standards will not have any material impact on the Company’sconsolidated balance sheet as described in note 4 of our annual consolidatedfinancial statements.

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**Liquidity, Cash Flows and Capital Resources**

Our operations andcapital expenditures are mainly financed through cash flows from operatingactivities, the use of our liquidity, as well as the issuance of debt andcommon shares.

Our cash and short-term investmentsposition reached more than $61 million as of December 31, 2006, comparedto $34.9 million as of December 31, 2005. We believe that these liquiditieswill be adequate to meet operating cash requirements for the foreseeablefuture. However, possible additional operating losses and/or possibleinvestments in the acquisition of complementary businesses or products mayrequire additional financing.

The variation of ourliquidity by activities is explained below, not considering any cash flows usedor provided by discontinued operation activities.

**OperatingActivities**

Cash flows used by our continuingoperating activities were $15.7 million for the year ended December 31, 2006compared to $3.4 million during the same period in 2005. Cash flows used by ourcontinuing operating activities were $0.8 million for the year endedDecember 31, 2004 The additional cash flows used between 2005 and 2006 areprimarily attributable to lower license revenues, increased non-recurringcorporate expenses and additional spending in R&D related to the initiationof a Phase 3 program in BPH for cetrorelix, as well as to further advancementof targeted, earlier-stage development programs. Additional cash flowsgenerated by continuing activities in 2004, as compared to 2005, areattributable to non-periodic upfront and milestone payments received in 2004 fromcollaboration agreements. We expect cash flows used by our operating activitiesto increase in 2007, as we will pursue our Phase 3 clinical program with cetrorelixin BPH and will further advance targeted, earlier-stage development programs.

**FinancingActivities**

Forthe year ended December 31, 2006, cash flows used in continuing financingactivities were $0.8 million compared to $0.7 million during the same periodof 2005. These funds were mostly used for debt reimbursement. For the yearended December 31, 2004, cash flows generated by flnancing activities werefrom the issuance of shares following the exercise of stock options, net ofcash used for debt reimbursement.

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**InvestingActivities**

Cash flows used in continuing investing activities(excluding the change in short-term investments) amounted to $0.5 millionfor the year ended December 31, 2006. Cash flows were mainly used for thepurchase of property, plant and equipment, partly offset by cash flowsgenerated from the sale of a long-term investment. During 2005 and 2004, cashflows used in continuing investing activities (excluding the change inshort-term investments) amounted to $1.9 million and $1.6 million respectivelyand were used for the purchase of property, plant and equipment, as well as forintangible assets.

**ContractualObligations**

We have certaincontractual obligations and commercial commitments. The following tableindicates our cash requirements to respect these obligations:
| **(in thousands of US dollars)** | ** ** | **Payments due by period** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| **Unaudited**                                        | ** ** | **Total**                                 | ** ** | **2007** | ** ** | **2008-2010** | ** ** | **2011-2012** | ** ** | **2013 and  beyond** | ** ** |
| ** **                                           | ** ** | **$**                                     | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| **Long-term  debt**                                  |       | 1,423                                     |       | 719 |   | 704 |   | — |   | — |   |
| **Operating  leases**                                |       | 12,383                                    |       | 2,280 |   | 5,215 |   | 2,587 |   | 2,301 |   |
| **Commercial  commitments**                          |       | 8,925                                     |       | 5,478 |   | 3,447 |   | — |   | — |   |
| **Total contractual cash  obligations**              |       | 22,731                                    |       | 8,477 |   | 9,366 |   | 2,587 |   | 2,301 |   |

 

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**Outstanding Share Data**

As of March 2, 2007,there were 53,179,470 common shares issued and outstanding and there were 3,880,092stock options outstanding.

**Quarterly Summary Financial Information**

( in thousands of US dollars, except per share data)

 
| ** **                                                | ** ** | **Quarters ended**     | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|
| **Unaudited**                                             | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** |
| ** **                                                | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|                                                      |       |                        |       |   |   |   |   |   |   |
| Revenues                                                  |       | 12,631                      |       | 10,630 |   | 9,383 |   | 8,748 |   |
| Loss from  operations                                     |       | (6,794                      | )          | (5,756 | ) | (5,451 | ) | (6,106 | ) |
| Net earnings  (loss) from continuing operations           |       | 22,300                      |       | (4,669 | ) | (4,430 | ) | (5,901 | ) |
| Net earnings  (loss)                                      |       | 39,101                      |       | (1,569 | ) | (1,562 | ) | (2,580 | ) |
| Net earnings  (loss) per share from continuing operations |       |                        |       |   |   |   |   |   |   |
| Basic and Diluted                                         |       | 0.42                        |       | (0.09 | ) | (0.08 | ) | (0.12 | ) |
| Net earnings  (loss) per share                            |       |                        |       |   |   |   |   |   |   |
| Basic and Diluted                                         |       | 0.74                        |       | (0.03 | ) | (0.03 | ) | (0.05 | ) |

 
| ** **                                     | ** ** | **Quarters ended**     | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| ** **                                     | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|                                           |       |                        |       |   |   |   |   |   |   |
| Revenues                                       |       | 14,273                      |       | 9,023 |   | 10,161 |   | 13,747 |   |
| Earnings (loss)  from operations               |       | (1,988                      | )          | (4,358 | ) | (3,374 | ) | 137 |   |
| Net loss from  continuing operations           |       | (3,519                      | )          | (5,416 | ) | (5,108 | ) | (1,900 | ) |
| Net earnings  (loss)                           |       | 936                         |       | (3,759 | ) | 13,276 |   | 118 |   |
| Net loss per  share from continuing operations |       |                        |       |   |   |   |   |   |   |
| Basic and Diluted                              |       | (0.08                       | )          | (0.12 | ) | (0.11 | ) | (0.04 | ) |
| Net earnings  (loss) per share                 |       |                        |       |   |   |   |   |   |   |
| Basic and  Diluted                             |       | 0.02                        |       | (0.08 | ) | 0.29 |   | — |   |

 

*Note:**                 Per share data iscalculated independently for each of the quarters presented. Therefore, the sumof this quarterly information does not equal the corresponding annualinformation.*

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**Fourth Quarter Results**

**Consolidated revenues**for the fourth quarter 2006 were $12.6 million, a decrease of $1.7 millioncompared to total revenues of $14.3 million for the same period in 2005.This decrease is primarily due to a decrease in license revenues from ourcollaboration with Solvay Pharmaceuticals, partly offset by additional sales relatedto the recent launch of Cetrotide® in Japan.

**Consolidated R&D expenses**remained steady from $8.2 million in the fourth quarter of 2005 to $8.3 millionin the fourth quarter of 2006.

**Consolidated net earnings**for the fourth quarter 2006 were $39.1 million or $0.74 per basic anddiluted share, compared to $0.9 million or $0.02 per basic and diluted share forthe fourth quarter 2005. This increase in consolidated net earnings is mainly relatedto the gain on disposal of Atrium shares, net of income tax expense, for anamount of $22.2 million, to the recording of an income tax recovery of $26.2 million,as well as to the recording of a non-recurringR&D investment tax credit. This 2006 fourth quarter increase inconsolidated net earnings was partly offset by lower license revenues, additionalD&A expenses with respect to an impairment loss on non-core pharmaceuticaldevelopment projects and by the recording of future income tax liabilities onthe investment in an affiliated company.

**Outlookfor 2007**

We expect Cetrotide® (cetrorelix) to continue togenerate a significant part of our royalties.

We expect to benefit fromthe support of our existing partners and remain focused on and committed to aggressivelyadvancing our pipeline.

We expect R&Dexpenses to continue to increase in 2007 primarily due to the continuation ofour Phase 3 clinical development program with cetrorelix in BPH, the continuedclinical advancement of ozarelix and perifosine, as well as the emphasis onclinical development of targeted earlier-stage product candidates.

We believe that webenefit from a solid financial position to continue to execute our strategicbusiness plan as a late-stage, pure play biopharmaceutical company and emergeas a fully-integrated specialist-driven biopharmaceutical company with a focuson endocrine therapy and oncology.

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**Financialand Other Instruments**

**Foreign Currency Risk**

Sincethe Company operates on an international scale, it is exposed to currency risksas a result of potential exchange rate fluctuations. For the year ended December 31,2006, there were no significant operations using forward-exchange contracts andno significant forward-exchange contract is outstanding as of today.

**Credit Risk**

Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist primarily of cash and cash equivalents, short-term investmentsand accounts receivable. Cash and cash equivalents are maintained withhigh-credit quality financial institutions. Short-term investments consistprimarily of bonds issued by high-credit quality corporations and institutions.Consequently, management considers the risk of non-performance related to cashand cash equivalents and investments to be minimal.

Generally,the Company does not require collateral or other security from customers fortrade accounts receivable; however, credit is extended following an evaluationof creditworthiness. In addition, the Company performs ongoing credit reviewsof all its customers and establishes an allowance for doubtful accounts whenaccounts are determined to be uncollectible.

**Interest Rate Risk**

We are exposed to market risk relating to changes ininterest rates with regard to our short-term investments.

**Related Party Transactions and Off-Balance Sheet Arrangements**

The Company was part of atax loss consolidation strategy with its former subsidiary Atrium. In respectto that arrangement that terminated in October 2006 when the Company ceased tobe the controlling shareholder of Atrium, we had received a tax rulingdelivered by Canada Revenue Agency. All transactions are eliminated during theconsolidation process and income tax savings resulting from the interestexpense deduction is presented as discontinued operations.

All other significantrelated party transactions described in Note 21 of our Annual ConsolidatedFinancial Statements are related to the lease of office and manufacturing spaceto Atrium and the purchase of a patent from a senior officer of the Company. Alltransactions are measured at the exchange amount which is the amount ofconsideration established and agreed upon by the related parties.

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As of December 31,2006, we did not have interests in any variable interest entities.

**Risk Factors and Uncertainties**

**Risks Associated with Operations:**

·                  Manyof our products are currently at an early development stage. It is impossibleto ensure that the R&D on these products will result in the creation ofprofitable operations;

·                  Weare currently developing our products based on R&D activities conducted todate, and we may not be successful in developing or introducing to the marketthese or any other new products or technology. If we fail to develop and deploynew products on a successful and timely basis, we may become non-competitiveand unable to recoup the R&D and other expenses we incur to develop andtest new products;

·                  Evenif successfully developed, our products may not gain market acceptance amongphysicians, patients, healthcare payers and the medical community which may notaccept or utilize our products. If they do not achieve significant marketacceptance, our business and financial conditions will be materially adverselyaffected. In addition, we may fail to further penetrate our core markets andexisting geographic markets or successfully expand our business into newmarkets; the growth in sales of our products, along with our operating results,could be negatively impacted.  Our abilityto further penetrate our core markets and existing geographic markets in whichwe compete or to successfully expand our business into additional countries inEurope, Asia or elsewhere, to the extent we believe that we have identifiedattractive geographic expansion opportunities in the future, is subject tonumerous factors, many of which are beyond our control. We cannot assure thatour efforts to increase market penetration in our core markets and existinggeographic markets will be successful. Our failure to do so could have anadverse effect on our operating results;

·                  Werely heavily on our proprietary information in developing and manufacturing ourproduct candidates. Despite efforts to protect our proprietary rights fromunauthorized use or disclosure, third parties may attempt to disclose, obtain,or use our proprietary information or technologies;

·                  Wehave to forge and maintain strategic alliances to develop and market productsin our current pipeline. If we are unable to reach agreements with suchcollaborative partners, or if any such agreements are terminated orsubstantially modified, we may be unable to obtain sufficient licensing revenuefor our

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products, which mighthave a material adverse effect on their development and on us;

·                  Incarrying out our operations, we are dependent on a stable and consistent supplyof ingredients and raw materials. There can be no assurance that we will beable, in the future, to continue to purchase products from our currentsuppliers or any other supplier on terms similar to current terms or at all. Aninterruption in the availability of certain raw materials or ingredients, orsignificant increases in the prices paid by us for them, could have a materialadverse effect on our business, financial condition, liquidity and operatingresults.

**Cash Flows and FinancialResources**

We believe that we wouldbe able to obtain long-term capital, if necessary, to support our corporateobjectives, including the clinical development program of our products. Ourplanned cash requirements may vary materially in response to a number offactors, including: R&D on our products; clinical trial results; increasesin our manufacturing capabilities; changes in any aspect of the regulatoryprocess; and delays in obtaining regulatory approvals. Depending on the overallstructure of current and future strategic alliances, we may have additionalcapital requirements related to the further development of existing or futureproducts.

We have not entered intoany significant forward currency contracts or other financial derivatives tohedge foreign exchange risk and, therefore, we are subject to foreign currencytransaction and translation gains and losses. Foreign exchange risk is managedprimarily by satisfying foreign denominated expenditures with cash flows orassets denominated in the same currency. However, with companies operating inforeign countries, we are more exposed to foreign currency risk.

**Key Personnel**

Our success is alsodependent upon our ability to attract and retain a highly qualified work force,and to establish and maintain close relations with research centers. Thecompetition in that regard is very severe. Our success is dependent to a greatdegree on our senior officers, scientific personnel and consultants. The failureto recruit qualified staff and the loss of key employees could compromise thepace and success of product development.

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**Acquisition Program**

We intend to continue toacquire new technologies and/or businesses. There is no assurance that theCompany will make certain acquisitions or that it will succeed in integratingthe newly-acquired technologies or businesses into its operations. The failureto successfully integrate the personnel and operations of businesses which wemay acquire in the future with ours could have a material adverse effect on ouroperations and results.

**Volatility of Share Prices**

Share prices are subjectto changes because of numerous different factors related to its activityincluding reports of new information, changes in the Company’s financialsituation, the sale of shares in the market, the Company’s failure to obtainresults in line with the expectations of analysts, an announcement by theCompany or any of its competitors concerning technological innovation, etc.During the past few years, shares of Æterna Zentaris, other biopharmaceuticalcompanies, and the investment market in general have been subjected to extremefluctuations that were unrelated to the operational results of the companiesaffected. There is no guarantee that the market price of the Company’s shareswill be protected from any such fluctuations in the future.

**ContinuousDisclosure and disclosure controls**

The Company is a reporting issuer under the securitieslegislation of all of the provinces of Canada and is registered in the UnitedStates and it is, therefore, required to file continuous disclosure documentssuch as interim and annual financial statements, a Proxy Circular, an Annual InformationForm, material change reports and press releases with such securities regulatoryauthorities. Copies of these documents may be obtained free of charge onrequest from the office of the Secretary of the Company or through the Internetat the following addresses: www.aeternazentaris.com, www.sedar.com and www.sec.gov/edgar.shtml.

The Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer,has evaluated the effectiveness of the Company’s disclosure controls andprocedures as of December 31, 2006. Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in all material respects as ofDecember 31, 2006.

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**Changesin Internal Controls over Financial Reporting**

There has been no changein the Company’s internal control over financial reporting that occurred duringthe year ended December 31, 2006 that has materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

During 2006, in thecourse of its evaluation, Management had identified certain deficiencies in itsinternal control over financial reporting which the Company does not believe,either individually or in the aggregate, resulted in a material weakness to itsinternal control over financial reporting.

**Forward-Looking Statements**

This document contains forward-looking statements,which reflect the Company’s current expectations regarding future events.Forward-looking statements may include words such as anticipate, believe,could, expect, goal, guidance, intend, may, objective, outlook, plan, seek,should, strive, target and will.

The forward-looking statements involve risks anduncertainties. Results or performances may differ significantly fromexpectations. For example, the results of current clinical trials cannot beforeseen, nor can changes in policy or actions taken by such regulatoryauthorities as the US Food and Drug Administration and the Therapeutic ProductsDirectorate of Health Canada, or any other organization responsible forenforcing regulations in the pharmaceutical industry.

Given these uncertaintiesand risk factors, readers are cautioned not to place undue reliance on suchforward-looking statements. We disclaim any obligation to update any suchfactors or to publicly announce the result of any revisions to any of theforward-looking statements contained herein to reflect future results, eventsor developments.

On behalf of management,

Dennis Turpin, CA

Vice President andChief Financial Officer

March 2, 2007

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